Critics Question State’s $144 Million Tax Credit Program
Wednesday, December 21, 2011
With the state’s unemployment on the rise for the first time in two years, critics are questioning the effectiveness of a state program that has delivered more than $140 million in tax credits and incentives to Rhode Island businesses since 2008.
According to the annual Tax Credit Disclosure Report produced by the Division of Taxation, $144 million in credits and incentives have been offered over the last four years, with awards ranging from $2,000 for small businesses up to several million for larger corporations like CVS Pharmacy, Inc.
The awards are offered to help spur job creation and economic development in the Ocean State, but some say companies aren’t being held accountable for actually creating jobs. Critics question whether the state is gaining much from the program.
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“Our motto has always been prove it or lose it,” the Poverty Institute executive director Kate Brewster said. “[Companies] do not receive the scrutiny they should.”
More Reporting Needed
Businesses receiving tax credits were originally required to provide evidence of job creation or retention by recipients, but federal privacy laws prevented the Department of Labor and Training from reporting the information. Brewster, who says the Poverty Institute isn’t necessarily against offering the credits, said those restrictions have left policymakers unable to evaluation the program.
“A lot of the programs have job creation requirements,” Brewster said. “But we have no idea what outcome they're producing.”
Brewster said new legislation enacted last year will require tax credit recipients to report the job and wage data directly to the Rhode Island Division of Taxation. The first “Annual Unified Economic Development Report” is scheduled to be issued by the Division on January 15.
The report is supposed to provide information about the number of full-time and part-time jobs created or retained by the corporations receiving credits, information about employee benefits offered, and the extent to which any employees receive RIte Care or RIte Share health insurance.
State Rep. Donna Walsh, who pushed for changes in state law, said the new information will allow the state to analyze the program.
“We have to know whether these credits are a cost-efficient way of growing our state’s economy,” Walsh said. “We need to know which credits are working.”
Mazze: State Needs Credits
The credits offered by the state cover six categories: Corporation Project Status; Incentive for Innovation and Growth; Jobs Development Act; Distressed Areas Economic Revitalization Act – Enterprise Zones; Mill Building and Economic Revitalization Act; and the Motion Picture Production Tax Credit.
Some of the tax credits have come under more scrutiny than others. For example, Walsh said she isn’t sure the motion picture credits, which have amounted to well over $30 million over the last four years, have created many jobs in the state.
But Dr. Ed Mazze, Distinguished University Professor of Business Administration at the University of Rhode Island, said tax incentives are important for attracting and retaining businesses in the state. He said the credits support a vision for the types industries and jobs the state would like to have moving forward.
“Tax incentives are a competitive tool used in economic development. Every state offers incentive programs,” Mazze said. “Without our tax incentive programs, Rhode Island would not be able to attract businesses based on its unfriendly business environment and not be able to create jobs needed to bring down the 10+ percent unemployment rate and 15+ percent underemployment rate.”
Keith Stokes, executive director of the Rhode Island Economic Development Corporation, agreed with Mazze.
"Many of the state's tax credit programs do not fall within the RIEDC, but we do support tax credits which are strategically aligned with the state's economic and industry growth objectives and are targeted at bringing business investments and job creation into Rhode Island and making us more competitive regionally and nationally,” he said.
Transparency and Accountability are Missing
But Mazze acknowledged that there are some issues that cause concern when looking at incentive programs. He said the state wants an immediate tax revenue return to reverse budget deficits, which he believes is “unrealistic since incentives are given to develop and support an economic sector that will be important to the state in the long-term because it will create jobs and attract new businesses.”
Mazze also said companies should have to prove that they are creating jobs.
“For every incentive awarded, an economic benefit cost analysis should be conducted at least once a year reporting on the number of direct and indirect jobs created, the expenditures in the state by the company receiving the incentive and the business and individual taxes generated,” he said. “This is the only way to measure the return on investment of the incentive as well as the public benefit.”
Mazze continued: “Transparency and accountability are the missing parts of Rhode Island discussions on tax incentives. Rhode Island's ability to create jobs has been lacking since 2007 and tax incentives may be our only solution to reverse the trend of younger skilled individuals leaving the state and older individuals dropping from the labor force.”
Legal Corruption
Others are far more critical of the tax credits. GoLocalProv MINDSETTER and former candidate for General Treasurer Tom Sgouros said tax breaks are not the most efficient way to improve the state’s economy.
“Tax policy is important, but it isn't everything,” Sgouros said. “If you want to stretch a state's limited resources, offering tax breaks is an amazingly inefficient way to stimulate the economy. Infrastructure spending would be far more productive, and provide better roads and schools that everyone can enjoy, not just the successful businesses they have been shown to produce time and time again. “
All too often, Sgouros said, the credits also simply end up in the hands of connected people or companies.
“Conversely, targeted tax breaks are a far more efficient way to reward influential individuals and corporations than simply maintaining the roads and schools they depend on,” Sgouros said. “It's little more than legal corruption, but somehow it passes for normal.”
Job Training the Key
Brewster said proven outcomes are what her organization is looking for. She said the yearly reporting that should have been happening all along will add transparency to the process.
But she also suggested the state could stand to use funds for a more effective purpose: job training.
“We know our real needs in terms of increasing the skills of our work force and we know what we would be getting in return,” Brewster said. “We don't know what we're getting on [the tax credits.] There may be credit programs that are working well, but we don’t know.”
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